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Industry utilities in the financial industry: antitrust risks

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Elaine Johnston

Partner Co-Head Antitrust

New York

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01 November 2017

The regulatory response to the global financial crisis has impacted nearly all major functions of the investment banking industry, including trading, capital and liquidity requirements, risk management, compliance and governance. As regulatory scrutiny has increased, profitability has, inversely (and expectedly), decreased. In response to narrowing profit margins, many banks have started pursuing "industry" solutions, eg joint ventures with competitors that establish shared utilities for specified back-office and compliance functions. While these joint ventures undoubtedly have procompetitive benefits and often have no connection to market-making activities, given the close cooperation among competitors that is necessary for the creation and operation of these entities, these joint ventures carry antitrust risks. This article explores these risks and provides best practices for how to manage them.

Joint ventures in the financial industry

The classic outsourcing model used by banks to streamline their cost structures has been to rely on pre-existing third-party vendors to take over certain non‑core or administrative functions (eg information technology). In recent years, however, banks have begun teaming up with each other and (in conjunction with hand-picked fintech firms) forging "industry" utilities that collectively outsource key functions, such as client onboarding and "know your customer" services, payment settlement services, and customer reference data management, to a co-owned entity.

These joint ventures often involve the creation of dedicated service companies in which all the participating banks own shares. Although these joint ventures may not necessarily touch on market‑making activities or involve the exchange of price sensitive information, they do often involve data and other information that is critical to client relationships and the overall functioning of each bank.

There are many benefits to these collaborations, eg a reduction in operating costs for the participating banks, economies of scale and synergies from the pooling of complementary resources, and opportunities to improve the accuracy and consistency of data and create a standardised data model that benefits customers and provides comfort to regulators.

Antitrust risks

While industry utilities in the financial industry most likely have significant procompetitive benefits, these arrangements do involve collaboration and contact with close competitors and thus entail some level of antitrust risk. In the U.S., given that these ventures involve integration of resources and shared capital investment, for the purposes of Section 1 of the U.S. Sherman Act (which governs horizontal conduct among competitors), they would be likely to be evaluated under the less restrictive "rule of reason".1 Under a rule of reason framework, an industry joint venture would only be unlawful if its anticompetitive effects substantially outweigh its procompetitive benefits. Potential anticompetitive effects may include the following:

Potential loss of competition

To the extent the joint venture partners compete with each other at all with respect to the provision of the ancillary or back-office functions being outsourced to the industry utility, competition could be diminished. For example, if one investment bank is able to distinguish itself from other investment banks based on the quality of its customer reference data or the ease or efficiency of its security payments platform, arguably there would be some anticompetitive effect from removing that competitive lever.

Facilitation of collusion

In the creation and operation of the industry utility, joint venturing parties must work closely with each other. Even though the scope of the industry utility may be relatively innocuous and truly related to administrative/back-office functions, participation in the joint venture does give banks the means and opportunity to engage in collusion in other areas.2

Foreclosure of other potential joint venture participants

Other banks (eg horizontal competitors) may seek to join the joint venture in some capacity. While the joint venture is free to set membership criteria and exclude others from participation on that basis, banks seeking to participate in the utility could be adversely affected if their exclusion prevents them from competing with the members of the joint venture.

Foreclosure of third-party providers

Many industry utilities involve the supply of a service that would otherwise be provided by a third‑party provider. Such collaborations may create or increase market power, to the dismay of impacted suppliers.

Guidelines for minimizing the antitrust risk

To minimize these antitrust risks, banks should keep in mind the following guidelines:

  • Seek early input of antitrust counsel to: (i) assess the potential antitrust risks; (ii) provide specific compliance guidance relating to dealings with competitors; and (iii) assess whether the joint venture may be subject to premerger notification requirements.
  • Consult with antitrust counsel to ensure that: (i) the proposed membership criteria for the joint venture are defensible; and (ii) failure to give access to the joint venture to a competitor would not have an adverse effect on the ability of the excluded competitor to compete.
  • Ensure that the agreement establishing an industry utility clearly identifies the business justification for doing so.
  • To the extent possible, separate any employees working with the joint venture entity from any employees working in other divisions of the bank, particularly those relating to market-making activities.
  • Make no agreement with any joint venture partner that limits the company's freedom to act on matters outside the necessary scope of the joint venture, such as limiting the bank's ability to compete with the joint venture or provide the services of the utility independently to its own customers.
  •  Make no agreement with a joint venture partner that boycotts any third-party, whether that be a supplier/vendor seeking to partner with the utility or a competing bank seeking to join the joint venture.
  •  Avoid exchanging competitively sensitive information and, if needed, limit such exchanges on a need-to-know basis and to individuals whose responsibilities do not involve pricing and sales.


Like any endeavour that involves close cooperation and contact among competitors, bank joint ventures are susceptible to antitrust misconduct. If not approached with sufficient caution, a joint venture could draw the attention of antitrust regulators or private plaintiffs. But with the appropriate prophylactic measures in place, these antitrust risks can be managed effectively.

1 Similar provisions exist in other jurisdictions, eg Article 101 of the Treaty on the Functioning of the European Union.
2 On this point, the credit default swap (CDS) litigation is instructive. Although the CDS litigation concerned the creation of a bank-owned electronic clearinghouse for credit default swap transactions, and thus involved conduct more closely related to the traditional market-making functions of investment banks, it nevertheless serves as a cautionary tale. Among other things, plaintiffs in the CDS case alleged that the banks conspired to foreclose competition from competing exchanges. The plaintiffs survived a motion to dismiss by, among things, demonstrating that meetings took place among the participating banks in which they alleged a conspiracy was hatched.
Further information
This case summary is part of the Allen & Overy Legal & Regulatory Risk Note, a quarterly publication.  For more information please contact Karen Birch –, or tel +44 20 3088 3710.